Disillusioned Germans calm amid euro crisis

Commentary: In the streets, the people say: ‘Let Greece go’

BERLIN (MarketWatch) — As a keen observer of the reunification of Germany in the early 1990s, Robert Zoellick knows a thing or two about European integration. Now serving as president of the World Bank, the veteran American diplomat says “the key question is whether Europe wants a political and financial union to complement the currency union.”

Following talks last week with German Chancellor Angela Merkel, Zoellick lamented the lack of German leadership in resolving Europe’s debt problem, which he and others fear could morph into a replay of the 2008 financial crisis. Zoellick told a German magazine that, “when the East bloc collapsed some 20 years ago, Chancellor Helmut Kohl had a vision how things could develop. There is a total lack of this now.”

An American visitor cannot help but observe how relaxed Germans are to what is viewed elsewhere as an escalating crisis. ”Let the Greeks default,” say people on the street, instead of German taxpayer money endlessly flowing south to bail them out.

Merkel, for her part, seeks a middle path between insistence on fiscal rigor and European Union solidarity in helping Greece. On Sunday, with the French president at her side, she offered assurances that European banks exposed to peripheral country debt will be recapitalized. But she remains opposed to a leveraged use of the expanded bailout mechanism nearing approval by euro-zone governments. Read MarketWatch’s coverage of the weekend agreement to recapitalize the banks.

German disillusionment with the euro project extends beyond public opinion. The recent resignations of the two top German officials at the European Central Bank are evidence of mounting dissatisfaction within what is by far the largest euro-zone economy. Jurgen Stark, whose resignation from the ECB executive board in early September stirred financial markets, told this reporter that the ECB is no longer the rigorous Bundesbank-like institution that Germany agreed to in 1992 at Maastricht, Holland. That treaty creating the euro
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and anchoring a much bigger Germany to its French and other EU partners was viewed by then-Chancellor Kohl as the price to be paid for German unification.

Reuters

French President Nicolas Sarkozy and German Chancellor Angela Merkel say they have a plan to recapitalize overexposed European banks.

That a debt crisis could erupt within the common currency area was never contemplated by the euro’s founders. What to do about it has confounded policy makers for 18 months. A German official, when asked for the best-case scenario for resolution, replied, “a Greek withdrawal... a drastic measure but one that could prompt other debtors to get their acts together.” He continued, “Of course, this would mean a collapse of the Greek banks, that would have to be recapitalized by EU [i.e., mainly German] taxpayers.” All of this, he hastened to add, was unlikely, but it would be preferable to recurrent Greek bailouts that weaken the restructuring resolve of other problem debtors.

Like Greece, Germany has no good choices concerning the euro. While a policy-making elite sees the ECB as acting recklessly in buying member state bonds and veering dangerously away from financial rigor, there is no path back to the revered Deutsche mark. Thus, there is a Gordian knot of Germany being unable to either drop out of the euro, or at the other extreme, to assent to closer fiscal union that could ultimately allow French and other “Club Med” EU members set tax policy for Germans. In this context, leadership from Germany on the euro is all but impossible.

Merkel has repeatedly said that if the euro fails the European Union fails. Thus, she as well as opposition politicians, are likely to muddle through. The expanded European Financial Stability Facility will evolve. Greece will ultimately get more money. There will be agreed principles on recapitalizing banks. Markets may rally until the next crisis appears.

Last week in Berlin, Jean-Claude Trichet held his final press conference after eight years as president of the ECB. At the end of the month he hands over the reins to Italian Mario Draghi. To some disillusioned Germans, since their candidate for the ECB presidency withdrew from the running, Draghi’s ascension is further evidence that the bank is under the control of countries that are less disciplined and spend more freely than the thrifty Germans and Dutch.

Distress calls abound. Zoellick of the World Bank accuses Europe of “political bumbling.” The British prime minister, whose country does not use the euro, calls the situation “precarious” while time is running out. These messages are heard in Germany, but they prompt neither panic nor resolve.

Barry Wood, North American economics correspondent for RTHK in Hong Kong, has reported on the euro since its inception.

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